'Top notch' is of American origin and followed on from the earlier, British 'topping'. The US also later adopted 'the tops'. All these phrases mean the same thing. Presumably, those who were 'top notch' had avoided the indignity of being 'taken down a peg'.
The earliest example I've found of 'top notch' in print is in a letter to the Huron Reflector, May 1845:
"Now, Messrs. Editors, perhaps I have lived too long in the woods, to know exactly what makes good manners in the very top notch of society."
See other phrases that were coined in the USA.